Percentage in point, also known as pip, is the smallest price move that an exchange rate can have based on forex market convention. A lot of currency pairs are priced out to four decimal places, and the pip change is the last or fourth decimal point. Therefore, a pip is equal to 1/100 of 1% or one basis point.
For instance, the smallest move the USD/CAD currency pair can make is $0.0001 or one basis point.
The Way it Works
As all traders know, a pip is a basic concept of foreign exchange. Forex pairs are used to disseminate exchange quotes through the bid. Then, ask quotes that are perfect for four decimal places. To make it simpler, forex traders buy or sell a currency whose value is expressed in linked to another currency.
The pips measure every movement done in the exchange. And since most currency pairs are quoted to a maximum of four decimal places, the smallest possible change for these pairs is one pip. A trader could calculate a pip’s value by dividing 1/10,000 or 0.0001 by the exchange rate.
An example of this is a trader to wishes to purchase the USD/CAD pair would be buying the U.S. dollar and simultaneously selling Canadian dollars. On the other hand, a trader who plans to sell U.S. dollars would sell the USD/CAD pair, buying Canadian dollars at the same time. Typically, traders use the term pips to talk about the spread between the bid and ask prices of the currency pair. Also, this is their way of indicating the amount of gain or loss that could be realized from a trade.
Aside from that, the Japanese Yen (JPY) pairs are quoted with two decimal places, designating a notable exception. Now, for currency pairs like EUR/JPY and USD/JPY, the value of a pip is 1/100 divided by the exchange rate. For instance, if the EUR/JPY is quoted as 132.62, one pip is 1/100 divided by 132.62 is equals 0.0000754.
Profitability
Now, the movement of a currency pair concludes if a trader has made its profit or loss from the position at the end of the day. And a trader who purchases the EUR/USD would profit if the euro boosts in value relative to the U.S. dollar. For instance. If the trader bought the euro for 1.1835 and exited the trade at 1.1901, the trader should make 1.1901 minus 1.1835 equals to 66 pips on the trade.
